The Electronic Trade Documents Act 2023 – the future is now?

Posted: 20/09/2023

A significant milestone has today been reached in the UK’s journey to the digitalisation of trade with the entry into force of the Electronic Trade Documents Act 2023. With effect from Wednesday 20 September 2023, digital versions of international trade documents such as bills of lading will have the same legal recognition under English law as their traditional paper counterparts.

This is a major step forward for the modernisation of international trade and is anticipated by the UK government to boost the UK economy by over £1 billion over the next decade through removing barriers of time and cost associated with exchanging paper documents. 

What does the act do?

Deliberately broad in scope and with a non-exhaustive list of the types of documents covered, the act includes definitions of ‘paper document’ and ‘electronic trade document’ and provides that, if certain criteria are met, an electronic trade document ‘has the same effect as an equivalent paper trade document’. Crucially, it also provides that an electronic trade document is now legally capable of ‘possession’.

The issue of ‘possession’ has, until now, been the main roadblock to the legal recognition of electronic trade documents -  how can something that only exists digitally be ‘possessed’ by one party at a time, in order to provide clear evidence of title to the underlying goods represented by the document? The development of distributed ledger technology and blockchain systems in recent years is providing an answer, establishing  a ‘reliable system’ for the identification and control of electronic trade documents. This will be the development of most interest for those involved in the financing of trade, where the possession of negotiable trade documentation is crucial if seeking to take any form of security over the goods represented by such documentation.

Electronic trade documents and reliable systems

Under the act, a document constitutes an electronic trade document if a ‘reliable system’ is used to:

• identify the document and distinguish it from copies;
• protect it from unauthorised alteration;
• secure it such that only one party can control it at a time;
• allow for a party to demonstrate their control of the document; and
• ensure that a transfer of the document effectively gives control of it to the other party.

There is no specific definition in the act of what constitutes a reliable system, although a number of indicative factors are provided. This is to ensure that the act is not overly restrictive and allows for it to continue to adapt and apply as the relevant technology develops.

It is expected that industry standards and practice will develop over time to help support market adoption of electronic documents. Collaboration will be key to ensure success. To date, whilst some industry titans have sought to establish their own platforms as market leaders for digital trade, there is little consensus so far on the preferred arrangements. Trade counterparties will need to be able to access and operate on the same platform in order to exchange documents effectively.

The end of paper?

The act provides the flexibility for the conversion of paper documents to electronic versions, and vice versa. This should help to address some of the possible issues of trade transactions where not all of the parties or jurisdictions involved are adequately set up to recognise or operate with electronic trade documents. Paper will continue to have a place in the world of international trade, at least for now.

However, with the International Chamber of Commerce estimating that approximately 80% of trade documents globally are based off English law, and many Commonwealth nations having legal systems modelled on English law, the introduction of the act in the UK is likely to see equivalent legislation appear in other nations in due course as the benefits of this new legal recognition become more apparent and fears of the unknown begin to ease. 

A handful of other jurisdictions have already enacted their own legislation dealing with electronic trade documents, based on the United Nations’ Model Law on Electronic Transferable Records, including Singapore and the Abu Dhabi Global Market in the UAE, while China, Japan, and South Korea each have their own form of laws dealing with possession and transfer of electronic documents.

What’s next?

Although the act has only just come into effect, the digitalisation process has been ongoing within the industry for some time, with the International Trade and Forfaiting Association’s Digital Negotiable Instruments Initiative and the FIT (Future of International Trade) Alliance being just some examples. 

The express legal recognition of electronic trade documents as having equivalent effect to paper documents is a considerable step forward, and is likely to be a catalyst for further changes globally and a confidence boost for traders and financiers alike.

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